The Bank of Canada’s 25 basis point rate cut this week shouldn’t have much impact on mortgage rates, Fitch Ratings announced on Friday, but it does bolster the credit-rating agency’s view that the Canadian economy is weak and the country’s overvalued housing market faces a risk of decline.
“Given the current rate environment, which has been at near-record lows for several years,” New York-based Fitch does not expect the rate cut to have much impact on mortgage rates or affordability for current borrowers, the agency says in a research note published Friday.
However, Fitch continues to view the Canadian housing market as overvalued by approximately 20% on a national basis, with modest variation between provinces. Furthermore, some regional markets are already showing signs of weakness, the Fitch research note says.
“In Alberta, where low energy prices have been placing downward pressure on the economy, prices have been volatile,” the Fitch research note says, noting that prices in Calgary are down by approximately 3% since October 2014, according to data from Teranet.
At the same time, Toronto and Vancouver are continuing to set new home price records, the Fitch research note says, and these markets are less likely to fall as they are “being supported by stronger economies and population growth.”
Overall, Fitch continues to expect a soft landing, nationally, where the price growth will ease, followed by modest declines. Significant downturns remain unlikely, but downside risks do exist, particularly in markets that have been dependent on robust construction and real estate activity in recent years, the Fitch research note says.